AIMA to launch fund of hedge fund guidelines

(July 2008) Due to the growing popularity of fund of hedge fund products, the Alternative Investment Management Association said it will publish the world’s first global guide to sound practices for fund of hedge fund managers.

Fund of hedge fund products are a rapidly growing segment of the alternative investment space. They are increasingly the vehicle of choice for an investor’s first foray into hedge funds, AIMA says.

According to Hedge Fund Research, global hedge fund industry assets have grown from an approximate $1.426 trillion US at the end of 2006 to an approximate $1.875 trillion US at the end of Q1 2008. During this period, the number of funds of hedge funds has grown from 2,220 to over 2,600.

That growth provided the impetus for AIMA to produce the guide — which is due for publication in early 2009 and is being developed by some of the leading fund of funds practitioners. It will focus on areas such as risk management, disclosure to investors, valuation, management of conflicts of interest and other operational issues.

“There are currently no dedicated guidelines for fund of hedge fund managers yet the majority of new institutional investors tend to favour this investment route, rather than investing directly in hedge funds,” says Andrew Baker, deputy CEO of AIMA, which is headquartered in London, England. “With established sound practices in place for hedge fund managers and on various hedge fund–related topics, there is a desire to document managers’ activities and responsibilities.”

The guide will be produced by a steering group of fund of hedge fund managers that between them manage $150 billion US of assets worldwide. The group, which is chaired by Gilles du Fretay, president of HDF Finance, includes Financial Risk Management (FRM) and consists of representatives from Man Investments, Fauchier Partners, Allianz Alternative Asset Management, Unigestion, Pacific Alternative Asset Management Company, Ivy Asset Management Corp. and Penjing Asset Management.

AIMA Canada hopes to release the guidelines to its membership in the new year.

“Certainly AIMA Canada, as a part of AIMA Global, will be promoting the document amongst its membership,” says Andrew Doman, executive secretary of AIMA Canada.

In Canada, Doman says the fund of hedge fund universe requires specific attention right now because of its popularity among novice hedge fund investors. He says investors choose these products because of the diversified exposure they offer investors to hedge funds. The single biggest risk, however, is the management risk of the underlying funds. He believes guidelines will help to increase transparency and improve risk management on this front.

“In particular, [the guide should] focus on risk management, disclosure to investors and valuation procedures which are at the forefront these days. Also, management of conflict of interest is an important issue,” Doman says. “Around the world you have governments and regulatory agencies that have guidelines for local jurisdictions. As we all know, the hedge fund industry is not country specific; it’s globally focused. Having a broader set of guidelines in addition to regional requirements is a positive thing for the overall industry.”

Doman notes that AIMA Canada members will not be obligated to follow the guidelines once the guidebook is released. He says, however, that it’s generally good business to adopt sound practices.

“The key issue for us is that it’s a proactive document that’s not being written up by a regulator but by a participant — which is a good thing, because we’re the ones in the trenches managing the money from a day-to-day perspective,” he says. “AIMA as an organization globally as well as its various chapters around the world has a representative number of participants or stakeholders in the industry that will be significant participants in its writing.”

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(07/08/08)